Dec 22, 2023 - Economy

Why everyone was so wrong about the 2023 economy

Illustration of the text "2023" written out, with the "0" replaced with a face exhalation emoji.

Illustration: Aïda Amer/Axios

Call it the Big Whiff — last year at this time, most economists, many journalists and a lot of regular folks felt certain that the U.S. was headed into recession.

Why it matters: We weren't. The failure of the U.S. economy to, well, fail in 2023 was one of the year's biggest and happiest surprises, the top of a list of horribles that failed to materialize.

Catch up fast: Many economists and finance experts believed that the Federal Reserve's battle to tame high inflation with rapid interest rate hikes would trigger high unemployment and a recession, as it had back in the 1970s.

  • In October 2022, Bloomberg Economics said there was a 100% probability of a recession happening within 12 months.
  • The next month, the Economist published a piece titled "Why a global recession is inevitable in 2023."
  • Many financial firms sent out remarkably negative forecasts. "We are expecting a recession in the first half of 2023," reads the Mortgage Bankers Association's outlook for the year.

Instead: The economy grew in 2023.

  • The unemployment rate also stayed low, as the job market cooled off but remained strong.

What they're saying: "I always said there was a significant risk of recession, but no certainty of recession," former Treasury Secretary Lawrence Summers told Axios.

  • "Given the strength of the economy, inflation has come down more than I expected," he said. "The economy appears stronger than would have been a best guess."
  • In a speech back in June 2022, and in remarks to Bloomberg, Summers said the unemployment rate in the U.S. would need to rise (as it would in recession) to tame high inflation. That hasn't yet happened.
  • Summers said a few things contributed to the decline in inflation this year, including "more favorable supply developments," like the price of oil and other commodities coming down, and the "credibility bonus" from the Federal Reserve's stronger than expected rate-hiking campaign.

Meanwhile: For about two years economist Claudia Sahm said she's been interviewed by journalists asking when the recession would hit. "I've done so many." Those calls have faded.

  • Sahm, a former Fed economist, was among the few in her profession who didn't see a downturn as inevitable in 2023. "I'm gonna take a victory lap on this one," she said.

Reality check: The Fed's rate hikes did trigger some pain in many parts of the economy. 

  • The real estate market is now, to put it technically, a mess. A lot of tech workers lost their jobs.
  • Last spring there was a mini-banking crisis, as high rates exposed weaknesses at some financial institutions.
  • But the hurt in certain sectors didn't spread to the "real economy," the realm in which regular Americans work and spend money. Most of us kept working and spending money.

What's next: Summers emphasizes that the battle against inflation is not over. According to the latest data, the Consumer Price Index is still a percentage point above the Fed's 2% target.

  • "Prospects for a soft landing look better than they did a year ago, but I certainly think it's premature to declare victory, given prevailing inflation rates," he said.

The bottom line: Predictions about the economy are more about what's going on in the present than what will happen in the future.

  • And at this time last year things looked bleak  the stock market was down nearly 20%, inflation was at more than 6% — so it's no surprise that prognosticators saw doom on the horizon.
  • Something to keep in mind when you see the happy musings about 2024.
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